Big spender: Ottawa commits billions to healthcare, boosts RRSP limits

(February 18, 2003) Armed with a larger than expected surplus and buoyed by a resilient Canadian economy, Ottawa opened up the federal coffers today, committing billions of dollars in new spending to healthcare, defence and the environment. The federal budget also includes some tax reduction measures, including a long-awaited increase in RRSP contribution limits.

Budget Highlights

Healthcare $17.3 billion over three years Environment $3 billion over five years Military $800 million annually Education/Skills $2 billion over two years RRSP limits Raised to $18,000 over four years National Child Benefit $965 million annual increase

As expected, healthcare was the big-ticket item in today’s budget, the first for federal Finance Minister John Manley. Ottawa will spend $17.3 billion over the next three years on healthcare measures, including an immediate $2.5 billion health transfer to the provinces. The federal government agreed to the new healthcare spending at a First Ministers meeting earlier this month.

“In building the country we want, Canadians have told us that our public healthcare system is their number-one priority,” Manley said in his budget speech.

Manley pledged $3 billion over five years for environmental initiatives, including $2 billion for Ottawa’s climate change commitments under the Kyoto accord. “We must deal effectively with climate change to protect the natural legacy that we will leave for our children,” the finance minister said.

Nearly $2 billion has been dedicated to spending on children, with funding for the National Child Benefit program upped to $965 million annually. “We are making long-term investments to help working families with children break through the welfare wall and take control of their future,” Manley said.

The military gets an additional $800 million per year as well as an immediate $270 million for “urgent” requirements, such as a peacekeeping mission in Afghanistan. Other initiatives include $320 million over five years for affordable housing, $135 million over three years to combat homelessness, $2 billion over the next two years to support research and education and a $1.4 billion increase over three years in foreign aid.

Ottawa also plans to gradually raise RRSP contribution limits, starting with an increase to $14,500 from $13,500 for 2003. In 2006, contribution limits will have reached $18,000, with a corresponding increase for employer-sponsored registered pension plans. After 2006, increases will be indexed to average wage growth.

“With this measure, Canadians will be able to better plan for their retirement,” Manley said.

The budget includes a number of other tax-related measures, including an increase in the small-business deduction limit to $300,000 over four years, the phasing-out of the federal capital tax over five years and a decrease in corporate taxes for the resource sector.

Employment insurance premiums will be reduced next year and Manley has promised to begin consultations on a new regime for setting EI rates beginning in 2005. Critics say the EI premium system generates much more than is necessary to finance the EI program.

All told, the proposed new tax measures will cost Ottawa $665 million in fiscal 2003-2004, rising to $1.4 billion in the next fiscal year.

Total program spending increases 11.5% to $14.3 billion in 2003-2004, with healthcare and defence accounting for three-quarters of that amount.

Tax expert David Clarke of Collins Barrow in Ottawa, who joined Advisor.ca in the budget lock-up today, says he has some concerns about Ottawa’s priorities.

More Budget Coverage

Big spender: Ottawa commits billions to healthcare, boosts RRSP limits Retirement savers, small-business owners, lower income families see tax benefits Clouds and silver linings — Advisors react to budget Industry insiders see “spending budget” having little impact on advisors, clients RRSP increase disappoints industry associations; anti-fraud initiative garners praise Return to Budget 2003 main page

“When people hear the word ‘surplus,’ their first reaction is to spend it,” Clarke says. “People forget that there is a national debt we’re paying financing charges on. My concern is that we now have the opportunity to pay down that debt, but if we spend the surplus, when times get bad, we’re going to be back into a deficit situation.”

The surplus for the current fiscal year is estimated at $6.4 billion, $2.4 billion more than predicted last October, due to stronger than expected employment performance in the second half of 2002.

The federal debt now stands at $47.6 billion, Manley said, and the accumulated deficit, expressed as a percentage of the economy, is projected to fall to 44.5% in 2002-2003 from a peak of 67.5% in 1995-1996.

This is Ottawa’s sixth consecutive balanced budget, and includes a $3 billion contingency reserve, which, if not needed, will go toward debt reduction. Manley also predicts a balanced budget for the next two fiscal years.

“Keeping a balanced budget, cutting debt and getting the best value for money are a constant challenge and a constant imperative,” Manley said. “These are the bedrock of our fiscal and economic strategy.”

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For more information about today’s federal budget, visit the Department of Finance Web site at http://www.fin.gc.ca.

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What do you like or dislike about federal budget 2003? Was there anything missing, in your view, or is there anything you’d particularly like to applaud? Share your opinions in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(02/18/03)

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